No tax on wrongly paid amount, says Income-tax Appellate Tribunal

MUMBAI: Tax cannot be levied on an amount wrongly paid to a person because of a mistake made by the payer, according to a recent order by a division bench of the Income-tax Appellate Tribunal (ITAT).

In this case, the taxpayer company, Tata Investment Corporation, moved the ITAT after it was levied tax on dividend it received on the shares it had already transferred to other entities. The taxpayer is a a non-banking finance company. Since the transfer of shares was not entered in the records of the company whose shares were sold by taxpayer company, the dividend for a particular year was wrongly issued to the taxpayer company.

In its order on July 15, ITAT pointed out that Section 72 of The Indian Contract Act, 1872 stipulates that a person to whom money has been paid, or anything delivered, by mistake or under coercion, must repay or return it and therefore amounts received by the mistake of the paying party cannot be construed as income of the receiver and therefore not liable to be taxed.

All income cannot be taxed, but only those incomes on which the taxpayer has a legitimate and enforceable right is liable to tax, the ITAT held. According to ITAT order, taxmen do not have the right to tax any receipts as the law is well settled that all receipts are not income, only those receipts with the character of income can be assessed to tax.

The ITAT held that income can be considered "accrued" only when the taxpayer has a right to receive the income. Without a legally enforceable right, there cannot be an accrual of income.